Apple, Publishers File Opposition to Proposed DoJ Settlement

By Andrew Albanese
|

Aug 16, 2012

The first words of its filing say it all: “Apple has not settled with the Government.” Within the tight five-page limit imposed by judge Denise Cote, Apple yesterday voiced opposition to the government’s proposed settlement with three publishers (Hachette, Simon & Schuster, and HarperCollins) in its e-book price-fixing case, arguing that the company stands to be punished by the deal though it never “participated in, encouraged, or sought to benefit from collusion.” Apple urged the court to do one of two things: approve a more narrowly focused settlement that bars collusion; or reserve final judgment on the settlement until the company has had their day in court. In addition to Apple, the two non-settling publishers (Penguin and Macmillan) also filed opposition briefs.

Apple attorneys assailed the proposed deal, arguing that it would harm the company by nullifying its legal contracts without any testimony or documents having been introduced into evidence. “The need for a trial on hotly-contested issues affecting the eBook industry is clear,” the Apple brief states. “And delaying judgment would avoid imposing a settlement on Apple that implicates contracts that Apple is entitled to defend at trial.” That trial, which is on track for next summer, Apple argues, would allow the court to make determinations based on “admissible evidence,” whether Apple conspired with publishers.

“Apple respectfully submits that the Court should not simply take the Government’s word for it now and impose a penalty on Apple before it has had its day in court.” Simply terminating Apple’s contracts without proving a case in court, the brief states, would be unprecedented, and would cause “irreparable harm.” Apple also insists that if the deal is quickly approved, it would immediately appeal.

The brief also prominently raises the outpouring of public comments against the settlement, noting that 92% (800 of 868) submissions came from “actual market participants” who oppose the settlement, raising questions as to whether the deal is in the public interest.

“The Proposed Settlement has generated a firestorm of criticism,” the brief states. "Everyone from a United States Senator to authors to publishers to retailers big and small to readers have delivered the same message to the Antitrust Division: this decree does not serve the public interest and poses a significant threat to future competition.” Apple criticized that the government’s “casual dismissal” of the submissions. “These authors, publishers, retailers, and consumers know the marketplace better than anyone,” it notes. “They are concerned that the Government threatens to harm future competition in a nascent market that it does not fully understand.”

The Publishers

We already know how Penguin and Macmillan, the two non-settling publishers, feel about the government’s case—after all, they filed briefs in their defense earlier this year which staked out their cases strongly. In their five-page briefs opposing this settlement, both publishers show that they plan to flip the script and put Amazon’s practices on trial.

“This case has its roots in the aggressive below-cost e-book pricing policy Amazon introduced for certain e-books in late 2007, when the eBook industry was still in its infancy,” reads Macmillan’s brief. “The size of Amazon’s market share is at the center of this proceeding regardless of whose narrative the Court accepts. The government’s narrative, as told through its complaint and CIS, views Amazon’s monopoly as having been achieved by superior competition. By contrast, the narrative of the overwhelming number of the Tunney Act comments focus on Amazon’s below-cost pricing as a means by which Amazon ‘willfully maintained’ its monopoly; foreclosed competition with other potential distributors in the e-book market; and hindered competition in the markets for related products and services. However, there is agreement that the Publisher Defendants’ move to agency pricing (whether in parallel or, as the government alleges, in concert) led almost immediately to an erosion of Amazon's 90% market share.”

Macmillan puts Amazon’s current e-book market share at roughly 60%, and argues that the government’s dismissal of the outpouring of public comments, and the lack of facts upon which the final settlement is based, are paving the way for Amazon to recapture its “monopolist” market share. “It is inconceivable how the government can argue that the proposed relief is in the public interest without having first considered whether that relief may cause more harm than it remedies,” the brief argues. “Here, the government’s failure to provide any factual foundation or analysis with respect to possible competitive effects on the market or third-­parties of Amazon's foreseeable reconstituted 90 percent monopoly alone requires denial of the government's motion.” Like Apple, Macmillan proposes the court delay ruling on the settlement until after trial—or to reject it entirely.

Penguin, meanwhile, takes a slightly more creative approach in its five-page submission. "The Court has allowed Penguin to file a brief submission to provide any ‘corrections’ or ‘observations’ about the Department of Justice’s Tunney Act filings. Here it is: The Emperor has no clothes.”

Like the other filings, Penguin goes on to counter the government’s “naked assertion” that the agency model has resulted in higher e-book prices. “One of the fundamental fallacies underlying the Government’s proposed settlement (and its allegations in this litigation) is that eBook prices were $9.99 and then increased to $12.99 or some other definitive price point,” the Penguin brief states. “This concept, however, is a myth—and, to get to the truth, one must systematically examine actual pricing, which the Government apparently has not. Or if the Government has done so, that analysis has not been shared with the Court or the public—calling into question the fairness and reliability of this Tunney Act procedure.”

The brief makes a critical point—the government insists that e-book prices have risen, but risen from what? From an artificially low price set by Amazon, at a time when the controlled 90% of the market? Further, Penguin says, on the whole, e-book prices did not spike following the agency model. “If there is one point we think needs to be made clear, it is that there was no uniform $9.99 price point when Amazon was authorized to price each Publisher Defendants’ eBook titles,” the Penguin brief states. Citing “pre-agency, month-by-month pricing of Penguin new releases,” Penguin says more than 62% of e-books with hardcover list prices over $20 were priced by Amazon above $9.99, with many around $15. “The pricing of eBooks may be complex, but what is absolutely clear from that data is that the price of new release Penguin eBooks did not unvaryingly move from $9.99 to $12.99 post-agency.”

If approved, the three settling publishers would have seven days after the judgment is finalized to terminate its agency model agreement with Apple and to enter into a new term of sale agreement. In addition, the publishers would be subject to a number of compliance requirements. The settlement would be in effect for two years. While deciding to settle with the DoJ, the three publishers deny any wrongdoing.

The DoJ case, meanwhile is just one front in the price-fixing battle. There is also a consumer class action case and a state settlement in the works. Regarding the state settlement, Ohio attorney general Mike DeWine asked yesterday asked Cote for a short extension, until August 29, to work out details in its settlement with publishers,which, DeWine acknowledges, "has proven to be a far slower process than we originally contemplated."

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